Euro-Area Manufacturing, Services Shrink for 6th Month: Economy

By Simone Meier -
Jul 24, 2012

Euro-area services and manufacturing
output contracted for a sixth month in July, adding to signs of
a deepening economic slump.

A composite index based on a survey of purchasing managers
in both industries in the 17-nation euro area was unchanged at
46.4, the same level as in June, London-based Markit Economics
said today in an initial estimate. A reading below 50 indicates
contraction. In the U.S., manufacturing probably weakened in
July, a Bloomberg survey shows ahead of a report due later
today.

The euro-area economy may be in a recession, defined as two
consecutive quarters of contraction, after the worsening debt
turmoil forced Spain and Cyprus to seek international aid last
month. The euro yesterday dropped below its lifetime average
against the dollar and Moody’s Investors Service cut the outlook
to negative for the Aaa credit rating of Germany, citing
“rising uncertainty” about the fiscal crisis. In China,
manufacturing may contract at a slower pace in July, a private
survey indicated today.

“The purchasing managers surveys reinforce suspicion that
the euro zone is headed for further clear gross-domestic-product
contraction in the third quarter,” said Howard Archer, chief
European economist at IHS Global Insight in London. The 17-nation economy “is having to cope with a serious tightening of
fiscal policy in many countries, markedly rising unemployment,
limited consumer purchasing power, tight credit conditions and
muted global growth that is limiting export orders.”

Spanish Bonds

The euro was little changed against the dollar after the
report and traded at $1.2108 at 11:23 a.m. in Brussels. Spanish
10-year bonds declined, pushing the yield on the securities to
7.58 percent at 10:12 a.m., a euro-era high and above the levels
that forced Greece, Ireland and Portugal into bailouts.

A gauge of euro-area manufacturing fell to 44.1 this month
from 45.1 in June, the report showed. That’s the lowest in 38
months, according to Markit. An indicator of services output
advanced to 47.6 from 47.1, Markit said. A gauge of German
manufacturing output also declined in July.

European leaders have struggled to restore investor
confidence in the region’s fiscal health since Greece became the
first of five nations to seek aid from international lenders.
Last month, a new push for enhanced joint budgetary control and
closer financial-sector integration was overshadowed by Spain
and Cyprus both asking for assistance.

German Confidence

Moody’s said yesterday that the increasing likelihood of
collective support for European countries including Spain and
Italy is “adversely” affecting the Aaa credit ratings of
Germany and the Netherlands. Officials from Greece’s troika of
international creditors arrive in Athens today.

With at least six euro-area states already in a recession,
Germany’s expansion helped prevent the 17-country economy from
shrinking in the first quarter. The German economy, Europe’s
largest, has since shown signs of slowdown, adding to concerns
of a euro-area recession. German business confidence probably
declined a second month in July, a Bloomberg survey shows.

In France, business confidence dropped to the lowest in 2
1/2 years in July, Paris-based statistics office Insee said.

The International Monetary Fund said earlier this month
that the euro-area economy may shrink 0.3 percent this year
before expanding 0.7 percent in 2013. The global economy may
expand 3.9 percent next year instead of a previously projected
4.1 percent, the Washington-based fund said.

‘Severe Slump’

The EU’s statistics office will release a first estimate of
euro-area second-quarter GDP on Aug. 14. ABN Amro NV estimates
that GDP declined 0.4 percent in the second quarter and will
shrink 0.2 percent in the third quarter.

“The euro-area downturn showed no signs of letting up at
the start of the third quarter,” Chris Williamson, Markit’s
chief economist, said in the report. “The downturn is being led
by an increasingly severe slump in manufacturing, where output
is falling at a quarterly rate of around 1 percent.”

China’s preliminary reading was 49.5 for a purchasing
managers’ index released today by HSBC Holdings Plc and Markit.
In the U.S., the world’s largest economy, an index based on a
survey of purchasing managers at factories probably dropped to
52 in July from 52.5 in June, according to a Bloomberg survey.

With global demand cooling and consumers holding back
spending, European companies may be forced to continue to cut
costs and eliminate jobs over the coming months. Euro-area
unemployment rose to 11.1 percent in May, a euro-era record.

Some Stores

Puma SE (PUM), Europe’s second-largest sporting-goods maker, on
July 18 cut its 2012 sales and profit forecasts and said it will
close some stores and may also eliminate jobs after business
slowed in the first half of the year. The slowdown was
particularly noticeable in Europe, the Herzogenaurach, Germany-based company said.

“A turnaround in sentiment can only be expected when the
future of the euro zone starts to look more secure,” Peter Vanden Houte, an economist at ING Group in Brussels, said in an
e-mailed note today. “Unfortunately, that does not seem to be
happening anytime soon.”